GM business operations solid despite recall crisis

DETROIT, MI- You never would have known General Motors Co. was in the midst of a so-called "crisis" judging by its 2014 annual shareholder meeting last week in Detroit.

There were no staged interruptions from protesters, attendance was a record low and even those who did speak during the 50-minute meeting didn't criticize the Detroit-based automaker's 34 recall campaigns of 15.9 million vehicles this year.

In fact, the only mentions of the recalls, including the highly-publicized ignition switch recall that has been linked to at least 13 deaths and more than 50 accidents, were from GM CEO Mary Barra to reporters before the meeting and during her "State of the Business" address during the meeting.

"You should know as we move forward I will be guided by two key principles: First, to do right thing for those that were harmed and second, to commit to doing everything in my power with the senior leadership team to make sure something like this never happens again," Barra said during the meeting, where she dedicated roughly a quarter of her speech to the ignition switch recall.

General Motors CEO Mary Barra addresses the gathering during the 2014 General Motors Company Annual Meeting of Stockholders Tuesday, June 10, 2014 at GM Global Headquarters in Detroit, Michigan.Photo by John F. Martin for General Motors

The lack of attention regarding GM's current recall situation underscores what automotive analysts have been speculating for months: The recalls are not detrimentally impacting the automaker thanks to Barra's proactive approach to addressing the problem, GM's current lineup of vehicles and a lack of caring by consumers.

"The way this is being handled right is as good as it possibly could be," said Bank of America Merrill Lynch analyst John Murphy June 9 during an Automotive Press Association meeting in Detroit. "I don't think there's anybody who would argue this is a good situation in any way shape or form, but I think they are doing a great job."

Murphy added that's in no way meant to downplay the tragedies that the faulty ignition switches have caused, but all aspects of GM's business operations are looking up.

From 2010 through the first quarter of 2014, GM generated $630 billion in revenue, earned $32 billion before interest and taxes and delivered almost $18 billion in adjusted free cash flow. GM also has invested almost $11 billion of capital in 35 U.S. facilities since 2009.

Even Wall Street, which hasn't always been too kind to GM, has not sent the company's shares spiraling downward. In fact, shares are up roughly 80 cents since the ignition recall started.

"There are a lot of changes and positives that people are seeing out of this despite the tragedy," Murphy said. "Investors are looking at this as a potential focal point for GM."

General Motors Chairman Tim Solso (right) addresses the gathering during the 2014 General Motors Company Annual Meeting of Stockholders Tuesday, June 10, 2014 at GM Global Headquarters in Detroit, Michigan. Joining him at the meeting are (l to r): Executive Vice President Mark Reuss, Executive Vice President and CFO Chuck Stevens, Executive Vice President and General Counsel Mike Millikin, President Dan Ammann, CEO Mary Barra and Corporate Secretary Anne Larin. Photo by John F. Martin for General Motors

GM's sales also are holding their own, amid an onslaught of bad press and Barra being barraged on Capitol Hill by politicians and media. Earlier this month, the company reported a 12.6 percent increase in sales compared to a year ago – when the company wasn't labeled as being in a crisis.

Jessica Caldwell, Edmunds.com senior analyst, has speculated that the company's handling of its ongoing recall situation has even been beneficial to GM.

"The data suggests that for the most part, recalls have not discouraged Cobalt owners' loyalty to GM and Chevy," she said. "GM has done a good job communicating new car deals to affected Cobalt owners, many of whom were probably getting close to buying a new car anyway."

Edmunds.com reports 49 percent of people trading in a Cobalt for a new car last month purchased a GM vehicle. Of those people who traded in, 22 percent opted for a Chevrolet Cruze, which helps account for the midsize sedan's 40 percent sales increase in May.

Proactive

Since the ignition switch recall started in February, GM has been proactive and transparent with it findings.

The company's efforts were underlined last week, when GM released Valukas' 315-page report that detailed "a pattern of management deficiencies and misjudgments" from executives and employees of the automaker for more than a decade.

But even before the report was released, GM announced a flurry of customer-focused changes and programs in connection to the ignition switch recall.

On the customer front, the company offered free loaner cars to anyone who felt unsafe driving the vehicles and Barra addressed consumers' concerns in an array of videos.

Internally, the company made even more changes and announcements. Besides hiring Valukas and Feinberg, GM restructured its entire global engineering department in an effort to have better checks and balances; appointed Jeff Boyer as Vice President of Global Vehicle Safety, elevating and integrating GM's safety processes under a single leader; adding 35 product safety investigators that will allow GM to identify and address issues much more quickly; and instituting the Speak up for Safety program encouraging employees to report potential safety issues quickly and forcefully.

"GM is changing rapidly, and across the board for the good," Barra said during the company's shareholder meeting June 10 at the company's world headquarters in Detroit. "And while I am proud of these advances, I expect – and I know you expect, more."

General Motors CEO Mary Barra is sworn in on Capitol Hill in Washington, Tuesday, April 1, 2014, prior to testifying before the House Energy and Commerce subcommittee on Oversight and Investigation. (AP Photo/Evan Vucci)

Barra on Tuesday said GM does not expect any more people to be reprimanded as a result of the ignition switch situation.

Future uncertain

Although no more employees are expected to be reprimanded, GM likely will be in the coming months and years. The automaker continues to face criticism from families who have lost loved ones, owners of the affected vehicles and public officials.

Regarding public officials, GM continues to face numerous lawsuits and investigations from the U.S. Justice Department, two congressional committees, the U.S. Securities and Exchange Commission and others.

Recall-related expenses are expected to total roughly $1.7 billion so far this year. Those charges exclude compensation attorney Kenneth Feinberg's findings as part of the company's recently announced compensation program for families of victims and those who have suffered serious physical injuries as a result of faulty ignition switches.

Barra said the company expects to have an estimate of the compensation expenses once the parameters of the program have been set by Feinberg, who has handled compensation issues for victims and their families harmed in the 9/11 attacks, BP oil spill and Boston Marathon bombing.

Christian was part of a small protest outside of the automaker's Detroit headquarters Monday afternoon with Ken Rimer, whose 18-year-old stepdaughter Natasha Weigel was killed in a 2006 accident, also in a 2005 Cobalt.

Both voiced their displeasure with GM, saying the automaker should be held more accountable for its actions.

"I think GM needs to be held criminally liable," Christian said. "No money in the world can make up for what they've done."

Some, including Christian, speculate the number of fatalities connected to the recall is much higher than GM is admitting because it's only counting frontal-impact crashes.

Rimer, whose stepdaughter was a passenger in the backseat when the crash occurred, said his she is not one of the 13 currently being counted by GM, but her friend in the passenger seat, Amy Rademaker, is included. The driver of the vehicle survived the crash.

In March, the committee opened an investigation into GM and NHTSA's response to consumer complaints related to stalling, airbag non-deployment, and ignition switch problems.

During her first trip to Capitol Hill, Barra was questioned by more than 20 members of the House Energy and Commerce Subcommittee on Oversight and Investigation for over 2 1/2 hours regarding the delayed recall.

Discussions during the first hearing – entitled "The GM Ignition Switch Recall: Why Did It Take So Long?" – ranged from hypothetical situations about what could have happened if GM had acted differently to a possible cover up of the ignition switch problem in the mid-2000s.

Barra answered many of the questions from panel members by referring to the internal report, which was released last week.

Ignition switch recall

The ignition switch recall started Feb. 13 with 780,000 compact cars, including Chevrolet Cobalts, Pontiac G5s and Pontiac Pursuits from the 2005-2007 model years. GM expanded the recall Feb. 25 to include Saturn Ions and three other vehicles. The total then was 1.6 million vehicles worldwide.

Gary Pittam performs recall service on a Chevrolet Cobalt Thursday, April 17, 2014, at Al Serra Chevrolet in Grand Blanc, Michigan. (Photo by John F. Martin for General Motors)

Then, on March 28, GM again expanded the recall to include 971,000 vehicles from the 2008-2011 model years, which may have gotten the defective switches as replacement parts.

The problem can be caused by a heavy key ring or jarring from rough roads that can cause the ignition switch to move out of the run position and shut off the engine and electrical power. In the fatalities, the air bags did not inflate, but the engines did not shut off in all cases, GM said.